9/21/12

Another View of Procurement's Role - Part 3

In part one and part two we looked at how Procurement has become involved in purchasing legal services, the challenges this presents and then an alternative approach to how it might be done more effectively.

Maintaining Alignment

To demonstrate this misalignment, consider our acquisition matter from Part 1. A client, perhaps overly concerned about risk on a deal, makes continued and on-going due diligence requests. With a fee cap in place, the client has little concern over the cost of expanded diligence, so why not be safe and make the expanded requests? These types of requests can unnecessarily drive up the cost of the service and even complicate the negotiation phase, as the acquiring party is now more suspect of the purchaser and will push harder on certain issues. The client, inadvertently, is creating an unhealthy relationship with its outside counsel. The goals and incentives for each side are misaligned. So although the client may come out reasonable well in this specific example, the long-term relationship will suffer.

I submit that clients will benefit from healthy long-term relationships with outside counsel. When outside counsel is truly a trusted adviser, clients receive better results. And by making cost savings a combine goal, meeting budgets will be an integral part of these successful results.

Does this means Procurement should be locked out of the process? Definitely not. However, I think they will bring the highest value to the process by serving in an advice and counsel role to GCs. GCs are experts in the law and hiring law firms. Procurement brings expertise for qualifying and quantifying savings. So it is best to keep the GC in their role, allowing them to select the right outside counsel for a given engagement. If a company allows cost to become the driving factor in selecting law firms, then companies will succeed at lowering cost, but likely at the cost of trusted relationships and getting the right level of service.

To highlight this possibility, consider again our acquisition example. First, Procurement will not be involved in the management of the matter and will have no knowledge of the problems that occurred. And likely, at the end-of-matter review, Procurement will conclude the outcome a success since the acquisition was completed and the budget was met.

Procurement, by design, works to neutralize relationship in the selection process. In a formal RFP process driven by Procurement, all informal communications are cut off. In order to neutralize relationships and level the bidding field, all communications go through pre-defined, formal channels and are shared with the entire group of bidders. Although this process is fair and drives prices down, per its intent, it also neutralizes what should be a trusting relationship between lawyer and client. In my experience, the most successful fee deals, both in terms of legal outcomes and meeting cost savings goals, come about due to a trusting relationship.

Address the Challenge

The moral of this story for GCs is essentially the same that is being told to law firm partners: The world has changed and now so must you. Partners and GCs are both far better served when they face the challenges of change. Sitting back and waiting to see how things will play out means you are letting others take over what should be your role and your business. Recently I heard a consultant suggest that in the future if things continue down this procurement path, GCs will no longer be part of the executive suite in a company. Instead, they may answer to the CFO or another executive.

In an ideal world, Procurement would act … ideally. But from what I am seeing in the market, this ideal world is some ways off. Instead, GCs may be bending to the will and drive of Procurement out of frustration and necessity. Are there some legal services that can be purchased on the basis of price? Yes. However, I would argue that legal services are at their highest value when they serve the strategic goals of a company. Savvy GCs will work hard and take on new challenges in order to maintain this level of value for their clients. Otherwise, as my old friend and mentor used to say, “we will be left with law firms standing in line with the toilet paper sales people, waiting to bid on the next RFP.”

Partnership, Partnership, Partnership

In my opinion, the keys to successful fee deals are trust and communication. These two things come about when lawyer and client sit down and define goals in a partnering approach. In my experience, most lawyers and firms really want to help clients succeed. Unfortunately as the market has evolved, clients and their lawyers have not been adapting well. Conversations about rates and fees have always been something to avoid. Now they need to be central to the conversation and to the success of the partnership between client and lawyer. Procurement can be an asset; however, I suggest GCs will be better served by driving this process. In turn the GC’s client’s best interest will be served.

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